Temporary trade agreements solve long-term problems

Temporary trade agreements solve long-term problems
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Business contracts can go bad. That’s simply a fact of life. When I was the CEO of Nucor Corporation, my team had to negotiate and approve many contracts with vendors and customers. All of them were temporary contracts. None were permanent. 

The Trump administration has floated the idea of sunsetting the North American Free Trade Agreement (NAFTA), a proposal which has attracted both scorn and support. As a former CEO, I do not understand why business contracts between countries, otherwise known as trade agreements, should be permanent.

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When contracts ended in the steel business, vendors had to prove that their quality and price justified Nucor renewing with them. That’s because technology may have changed, and new entrants may have emerged that we would prefer to buy from.

 

Similarly, Nucor had to prove ourselves to our customers as those contracts expired. To do so, we consistently focused upon improving our technology, our processes, our efficiency and our products. We could never take our customers for granted. 

NAFTA is a business contract between Mexico, Canada and the United States approved in 1993 and implemented in 1994. In the years immediately preceding NAFTA, Mexico was relatively stable and growing. U.S. politicians believed that Mexican consumers would become prosperous enough through NAFTA to start buying more U.S. products. 

But that didn’t happen. Circumstances changed. In 1994, Mexico suffered an outbreak of guerrilla violence that continued for years. The peso was drastically devalued, making U.S. goods much more expensive in Mexico, while Mexican imports became far cheaper. The U.S. export expectations of NAFTA’s tariff reductions were nullified.

The agreement became transformed into an automotive, electronics and machinery offshoring agreement as U.S. companies either relocated facilities south of the border or bought from Mexican companies producing there. The U.S. became a net buyer from Mexico rather than a net seller. Asian countries used NAFTA to trans-ship goods to the U.S. tariff-free.

But even if NAFTA were somehow perfect 25 years ago, since that time, it has become decidedly imperfect. Changing economic circumstances, political instability and new technologies require an overall rethink. 

At Nucor, when we renewed contracts, we made changes and improvements. Perhaps clauses on pricing or delivery conditions no longer made sense. Maybe we improved contract language governing the method of payment or the mix of goods.

That’s why these agreements automatically expired, only to be renewed if both parties agreed. This forced my management team to evaluate contracts that were about to expire. But permanent contracts, which are unenforceable in U.S. courts, would not have allowed us to make these improvements. 

The Korea-U.S. Free Trade Agreement (KORUS FTA) was approved in 2011 and implemented in 2012. South Korea and the U.S. dropped tariffs. Because South Korea’s tariffs were much higher than America’s, it looked like a good deal. 

But ultimately, the tariff reductions did not benefit the U.S. America’s goods trade deficit with South Korea doubled from $14 billion per year to $28 billion in the next four years. South Korea utilized its strategic nationalist economic policy to overcome their tariff reductions. U.S. exports remained flat while their imports soared.

A re-examination of the KORUS-FTA agreement is needed. Indeed, the first five years gave a clear indication that the dynamics were wrong for the U.S. The assumption that tariff cutting would benefit U.S. workers and companies proved incorrect.

Congress is accustomed to legislation that is not permanent. The Patriot Act was temporary. Congress debated its efficacy and replaced it with the Freedom Act. Budgets and appropriation bills are temporary. They must be debated and renewed. We would not want the House and Senate of any particular year to bind all future congresses to an obsolete budget.

We see this clearly in Congress having granted Permanent Normal Trade Relations (PNTR) status to China in 2000. Prior to that vote, Congress had been required to review and renew China’s trade status annually.

As with the KORUS FTA, pundits and politicians argued that China would be lowering tariffs and other barriers far more than we were, so it was obviously a good deal for U.S. producers — who would now supposedly have access to the vast Chinese consumer base.

Proponents also suggested that China would be subject to World Trade Organization (WTO) rules, and any violations would be halted through enforcement proceedings.

They were wrong. The result has been the largest bilateral trade deficit in U.S. history. China reversed its progress toward a market-based economy, and its currency manipulation overwhelmed any tariff cuts. State-sponsored hacking, intellectual property theft, dumping and massive subsidies became standard practice.

Unfortunately, there is no sunset provision in the PNTR agreement with China. Thus, it is virtually impossible to correct. 

The bottom line is that the U.S. economy would benefit from temporary trade agreements that automatically end subject to renewal and improvement. Permanent agreements lock in mistakes forever and allow politicians to avoid the hard work of deciding whether to improve deals are allow expiration.

Americans deserve better if we are to win the global competition for good jobs.  

Daniel DiMicco is chairman emeritus of Nucor Corporation, an American producer of steel and related products. He's also the chairman of the Coalition for a Prosperous America, an organization working at the intersection of trade, jobs, tax and economic growth.